August 2015 Investment Commentary – Volatility, China and Retirement Risk

As of August 31, 2015
Volatility, China and Retirement Risk*Includes reinvested dividends

 

I’m not sure if you like roller coasters, but the last couple weeks in the stock market have sure felt like one.

After years of relatively calm equity markets, we have finally suffered the first correction (decline of 10% from market high) since 2011, falling approx. -12% from the May 21st highs and snapping the third longest streak without a correction in fifty years.

 

What Caused It?

Many factors, but the key items are slower growth in China, concern over timing of the Fed rate hike and technical factors all played a role. We discuss how these changes impact your portfolio in our special press release along with our expectations for future returns.

Weaker than expected economic statistics in China have investors worried over a hard vs. soft landing as their economy slows. In addition, there is additional concern over whether their government officials will make the right decisions as the economy moves from an investment led to consumer based economy.   We have included a link to an information rich chart below that details key events in the Chinese stock market over the last year. Notice the recent decision on Aug. 11th to weaken their currency by 1.9% against the US dollar has concerned investors that their economy may be slowing faster than expected.

On a positive front US economic news remains resilient as the US economy is still in decent shape.   Job creation remains strong, home builder sentiment is the highest since 2005 and retail sales numbers came in higher than expected as evident with the recent 2nd quarter revised GDP report.

 

A Risk You May Not Have Thought About

Finally, we have included a link to an extremely important article titled Who Ate Joe’s Retirement Money. It discusses in detail what sequence risk is and how that impacts your ability to retire and reach your financial goals. Did you realize that two people who earned the same return (~5%) and invested the same amount over a 40 year return can end with materially different final portfolio values? This is the essence of sequence risk as the order of returns matter much more than your actual returns. You may be thinking how do we mitigate this risk? A dynamic asset allocation that adjusts your stock allocations based on market valuations significantly reduces the potential of running out of money in retirement. FSI will be discussing this concept further in future communications.

 

Our View

We have had four to five years with very little volatility so people forget these moves in the stock market are normal. That is why equities should return more than bonds/cash due to their higher risk and volatility.   One piece of advice is to avoid the financial media and don’t make any sudden moves you’ll regret. The media’s job is to sell news which results in sensational headlines on all financial websites. But reading a story with the headline “Market Bloodbath” does not help you reach your long-term financial goals.

What do you do now? That depends on your investment strategy because how you act in markets like this determines your future wealth. Please contact Financial Symmetry if you’d like to discuss our investment strategy and how we can help you.

 

Interesting articles read this last month

Who Ate Joe’s Retirement Money?

How Emotion Hurts Stock Returns

The ETF Flash Crash

Emerging Market Rout Continues

China’s Stunning Stock Market Moves in One Huge, Annotated Chart

 

Related FSI Posts

Lower Stock Market Means Higher Future Returns

July 2015 Investment Commentary

More Like This